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Chapter 3: Problem 16

Must consumers' surplus equal producers' surplus at the equilibrium price? Explain your answer.

Short Answer

Expert verified
No, it's not necessary for consumer's surplus and producer's surplus to equal each other at the equilibrium price in a market. Their values are determined by the shapes and relative positions of the supply and demand curves, not solely by the equilibrium price.

Step by step solution

01

Understanding Consumer and Producer Surplus

Consumer surplus is a measure of the economic benefit to the consumer from a purchase. It is the difference between the maximum price the consumer is willing to pay and the market price they actually pay. Producer surplus is a measure of producer welfare. It is the difference between the price at which a producer is willing to sell a product and the actual selling price of the product.
02

Understanding Market Equilibrium

Market equilibrium is achieved when the quantity demanded equals the quantity supplied. At this point, the price at which consumers are willing to buy and the price at which producers are willing to sell is the same, which is known as equilibrium price.
03

Understanding Surplus at Equilibrium

At the equilibrium price, the consumer and producer surplus need not be equal. The consumer surplus and producer surplus are based on the demand and supply curves, respectively, and not necessarily on the equilibrium price. Both surpluses depend on the shape and position of the supply and demand curves. Therefore, unless the supply and demand curves are congruent and symmetric, the consumer surplus and producer surplus will not be equal at the equilibrium price. They might be equal under specific conditions but, in general, they likely won't be.

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Most popular questions from this chapter

Identify what happens to equilibrium price and quantity in each of the following cases: a. Demand rises and supply is constant. b. Demand falls and supply is constant. c. Supply rises and demand is constant. d. Supply falls and demand is constant. e. Demand rises by the same amount that supply falls. f. Demand falls by the same amount that supply rises. g. Demand falls less than supply rises. h. Demand rises more than supply rises. i. Demand rises less than supply rises. j. Demand falls more than supply falls. k. Demand falls less than supply falls.

Explain how the market moves to equilibrium in terms of shortages and surpluses and in terms of maximum buying prices and minimum selling prices.

"The price of T-shirts keeps rising and rising, and people keep buying more and more. T-shirts must have an upwardsloping demand curve." Identify the error.

With respect to each of the following changes, identify whether the demand curve will shift rightward or leftward: a. An increase in income (the good under consideration is a normal good) b. A rise in the price of a substitute good (caused by a decline in supply) c. A rise in expected future price d. A fall in the number of buyers

True or false? As the price of oranges rises, the demand for oranges falls, ceteris paribus. Explain your answer.
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